2017 Year-End Planning for Art, Equipment, and Other Non-Real Estate 1031 Exchanges
The Tax Cuts and Jobs Act eliminates Section 1031 Exchanges for non-real estate transactions effective January 1, 2018. But you still have time to plan If you anticipated executing an early—2018 1031 Exchange with art, equipment, or other non-real estate investment assets.
The Act includes a transition rule that allows a taxpayer to complete a non-real estate 1031 Exchange during 2018 if the taxpayer either acquires replacement property for a “reverse” exchange or disposes of relinquished property for a “forward” exchange before January 1, 2018.
To take advantage with property you haven’t sold, consider causing a related-party taxpayer—such as a corporation you control—to purchase the property before year-end, and escrowing the proceeds with a qualified intermediary. The related party can sell the property to an unrelated party with a stepped-up tax basis a few years later. You can complete the 1031 Exchange in 2018 using the escrowed proceeds in the usual 1031 Exchange time frames.
For a reverse exchange, you can park replacement property purchased before year-end with an accommodation titleholder, and complete the exchange by selling the relinquished property in 2018 within the usual 1031 Exchange time frames, with the same result.
These strategies are not risk-less. For example, in the forward exchange scenario, you will recognize gain and pay tax if you can’t complete the exchange within 180 days, even though you initially “sold” property to a related party. But in the right situation, some taxpayers might nevertheless use the transition rules to make something out of nothing.
To read the transition rules, see page 192 of the Act.